Sonic Automotive, Inc. — Q3 2020 Form 10-Q
Business context and period: The filing covers the three and nine months ended September 30, 2020, compared with the same 2019 periods. Sonic operates franchised dealerships and EchoPark used-vehicle stores. COVID-19 restrictions and related supply-chain disruption affected sales and service activity; most retail restrictions had eased by quarter-end. Amounts below are in millions of dollars except per-share data and percentages.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2,548.5 | $2,702.7 | $6,968.5 | $7,705.9 |
| Gross profit | $376.6 | $386.8 | $1,034.5 | $1,127.1 |
| Gross margin | 14.8% | 14.3% | 14.9% | 14.6% |
| Operating income (loss) | $96.4 | $65.2 | $(71.9) | $215.5 |
| Net income (loss) | $59.8 | $29.0 | $(108.7) | $97.8 |
| Diluted earnings (loss) per share | $1.34 | $0.66 | $(2.55) | $2.25 |
| Operating cash flow | Not presented separately for Q3 | $273.0 | $(25.6) |
- Q3 operating income improved despite 5.7% lower revenue, helped by reduced selling, general and administrative expenses and higher vehicle gross profit per unit. SG&A was $257.2 million, down 13.4% year over year.
- Nine-month results include a $268.0 million non-cash goodwill impairment charge, recorded in Q1 in response to COVID-related economic disruption and a fall in market value. Without that charge, the reported nine-month operating loss would have been materially different; the filing does not present an adjusted GAAP result.
- Cash and cash equivalents were $125.7 million at September 30, 2020, versus $29.1 million at year-end 2019. Total available liquidity resources were reported at $453.5 million, including cash, credit availability, a floor-plan deposit and other facility availability.
- Long-term debt, including current maturities and net of debt issuance costs, was $733.6 million; floor-plan notes payable totaled about $1,172.1 million. Operating and finance lease liabilities totaled about $391.5 million.
Changes and operating trends
- Consolidated Q3 revenue declined 5.7% year over year; nine-month revenue declined 9.6%. Total retail new and used unit sales fell 9.7% in Q3 and 10.4% year to date.
- Franchised dealerships’ same-store Q3 revenue fell 5.6%, but same-store gross profit rose 1.5%. New-vehicle gross profit per unit increased 38.4% to $2,607, partly reflecting constrained inventory and higher average selling prices. Fixed Operations same-store gross profit fell 3.9%.
- EchoPark same-store Q3 revenue grew 5.5%, while same-store gross profit declined 16.9%. Combined used-vehicle and F&I gross profit per unit fell 15.4% to $1,800, amid used-vehicle pricing and acquisition-cost volatility.
- For the first nine months, franchised-dealership segment income before taxes and impairment charges was $138.8 million, up 3.0%; EchoPark segment income on the same basis was $4.9 million, down 30.3%.
Outlook, risks and unusual items
- Management expected continued economic recovery in the remainder of 2020 and into 2021, but gave no quantified company earnings or revenue guidance in the provided filing text. It expected new-vehicle supply shortages to affect Q4 and warned that renewed shutdowns could weaken demand.
- Sonic expected to open three additional EchoPark stores by year-end 2020. Management said expense-reduction actions were expected to generate about $7.0 million of monthly savings compared with pre-pandemic levels.
- During the first three quarters, the company placed about 1,700 employees on unpaid leave, most of whom had returned, terminated about 1,200 employees, reduced compensation and advertising expense, and postponed some capital spending.
- At September 30, the company reported compliance with its debt covenants and expected compliance for at least the next 12 months. Its reported actual liquidity ratio was 1.17 against a 1.05 minimum; fixed-charge coverage was 1.85 against a 1.20 minimum; and lease-adjusted leverage was 2.94 against a 5.75 maximum.
- Variable-rate instruments totaled about $1.1 billion after considering interest-rate caps; a 100-basis-point rate increase was estimated to change nine-month interest expense by about $13.7 million. COVID-19, vehicle supply, consumer demand, capital access, goodwill impairment, competition and litigation remain material risks.
- Legal proceedings are ongoing; Sonic accrued about $0.5 million in related current and long-term reserves and could not estimate a reasonably possible loss range beyond recorded amounts. General indemnification exposure was estimated at a maximum of $29.3 million, with no significant amount recorded.
- The company repurchased about 1.8 million Class A shares for $57.1 million in the first nine months. It declared a $0.10-per-share dividend for payment in October and approved another $0.10-per-share dividend for January 2021, subject to debt restrictions and board discretion.
Most important facts for investors to verify
- Whether the Q3 improvement in earnings and margins is sustainable as new-vehicle inventory constraints and COVID-related demand risks evolve.
- How much of reported operating cash flow reflects changes in inventory, receivables and floor-plan financing classification; management stated operating cash flow would have been $223.8 million if all floor-plan changes were classified as operating activities.
- The effect of the $268.0 million goodwill impairment and whether later operating or market changes could trigger additional impairment charges.
- EchoPark’s unit growth, per-unit profitability and store-expansion funding needs, alongside the company’s $55.7 million in facility-construction commitments.
- Available liquidity, covenant headroom, refinancing needs and exposure to variable interest rates, including the composition and accessibility of the reported $453.5 million liquidity resources.
- Future share repurchases and dividends, which remain subject to cash needs, debt covenants and board decisions.